Monday, September 30, 2013

Nervous Ahead of Government Funding


- Nervous ahead of government funding, mixes Fed-speak has investors pausing for the week.

Going to do something a bit different today. A brief market update (not much changed Friday) but then a discussion of how to be more successful in the market. There are issues I see in most all novice or intermediate traders, indeed experienced traders, that a quick refresher will help overcome. But first, the market.

Market pauses ahead of weekend ahead of government funding deadline.

Friday showed a session where investors/traders/fund managers/computer programs contemplated more wrangling over the weekend about a government shutdown ahead of the Tuesday 'deadline.' As if Tuesday is December 21, 2012 when the world was supposed to end. That is okay; wrangling, posturing, and brinkmanship is what we do in a republic versus having edicts issued from on high. Okay, we DO have edicts issued from on high, but we do have a Constitution that prevents that. We just aren't following our Constitution. Sadly, not a new development.

The indices handled it fairly well. Started lower but managed to fight back and recoup much of the losses. SOX was not so sanguine, gapping below the 10 day EMA and the near trendline.

SP500 -6.92, -0.41%
NASDAQ -5.84, -0.15%
DJ30 -70.06, -0.46%
SP400 -0.38%
RUTX -0.39%
SOX -0.79%

Overall, however, it was something like sitting on your hands ahead of the weekend as we listened to more chest beating and faux piousness from our 'leaders' in DC on both sides of the aisle over the government funding. Of course there was also Fed-Speak, and particularly rambling, incoherent Fed-speak at that from Mr. Evans. Evans gave the old 'we may taper in 2013 but we may taper in 2014' misdirection. Just adding more credibility to the Fed all the time!

Perhaps the market is simply riding it out, waiting for a brokered deal. If one doesn't develop it might be time for the market to take that test that pushes NASDAQ from the upper trendline back to the 50 day EMA as in August.

Maybe. Some say a failure to fund leads to a 1.4% decline in Q4 GDP. Of course, starting to get a handle on runaway spending starts putting the US on the path to turning away from an ever surging debtor nation, but that is the big picture that the stock market no longer looks at.

There certainly are still a lot of leaders that look very good indeed, leaders that have thus far weathered the 'horrid' 6 out of 7 days lower on SP500. You have heard it before on the financial stations, if the market is not going up every day something is terribly wrong. Looking at the patterns of the leaders and the indices, I don't see that. SOX is a bit worrisome after Friday with its small gap lower and it tends to lead moves, but again, leadership remains solid.

We ended up not buying anything as a lot of stocks turned off their intraday highs substantially, and frankly, if nothing is done over the weekend, and I doubt it will, there will be the same opportunities next week ahead of the Tuesday deadline.

End result: we plan to hang in and ride through the hot air turbulence emanating from DC the best we can. Leaders are holding up very well, and until that changes character the market is doing what it has to do in the face of the periodic Money Madness in DC. Okay, so it is not periodic but every day when you have a $17T debt, the IRS has $67M missing from what it has already taken from us for the healthcare Act, a food stamp recipient picking up sushi and lobster using his 'SNAP' card. But, of course, there is no room for cuts because as Ms. Pelosi puts it, the cupboard is bare. With that kind of scenario nothing meaningful will happen OTHER THAN a shutdown.


Dollar: 1.3522 versus 1.3483 versus 1.3521 10 year

Bonds: 2.62% versus 2.64% versus 2.61% 10 year

Oil: 102.87, -0.16

Gold bouncing up and down: 1338.50, +14.90


Stats: -5.83 points (-0.15%) to close at 3781.59
Volume: 1.675B (-6.27%)

Up Volume: 733.34M (-436.66M)
Down Volume: 910.63M (+301.21M)

A/D and Hi/Lo: Decliners led 1.56 to 1
Previous Session: Advancers led 1.47 to 1

New Highs: 104 (-36)
New Lows: 17 (-1)

Stats: -6.92 points (-0.41%) to close at 1691.75
NYSE Volume: 562.5M (+4.36%)

Up Volume: 786.13M (-823.87M)
Down Volume: 2.13B (+1.01B)

A/D and Hi/Lo: Decliners led 1.97 to 1
Previous Session: Advancers led 1.68 to 1

New Highs: 86 (-58)
New Lows: 86 (+3)

Stats: -70.06 points (-0.46%) to close at 15258.24


VIX: 15.46; +1.4
VXN: 15.65; +1.29
VXO: 14.68; +1.18

Put/Call Ratio (CBOE): 0.94; +0.24

Bulls and Bears:

Clearly diverging again with bulls running higher and bears falling, just as the market makes a turn for the worse. Similar action in June.

Bulls: 42.3% versus 37.1% versus 37.1% versus 38.1% versus 43.3%. Diving below the early July, late June levels. 48.4% versus 51.5% versus 52.1% versus 46.9% versus 43.8% versus 41.7% versus 46.8% versus 43.8% versus 45.8% versus 52.1% versus 54.2% versus 52.1% versus 47.9% versus 44.3% versus 47.4% versus 50.5%.

Background: Last undercut 35%, the threshold for bullishness, in early June 2012.

Bears: 21.6% versus 22.7% versus 23.7% versus 23.8% versus 21.6%. Finally breaking free from the 20 level that held for three weeks, and now matching the highs from late June and early July. Starting to get there but needs to jump toward 30.

Background: Over 35% is the threshold to be really be a good upside indicator. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.


Today a quick overview of some points to make you better at your stock investing and trading and perhaps overcome some obstacles that are holding you back.

I often see three main areas that hold people back from becoming a good investor and/or trader in any market, stock or otherwise.

1. Logic: Trying to apply your own logic to what a stock should do versus what the market is telling you a stock should do.

2. Patience: Letting a play come to you versus chasing it. Once in a play, having the patience to let a play work for you as long as all of the reasons for entering the play remain.

3. Money management: Letting winners run: Taking partial profits, having the confidence in your plan to let it work for you. There are other parts that we will discuss in other installments.


I often see a newer or even experienced investor complain that a stock is not moving versus another stock in a category even though the company in the lagging stock is purportedly a better company.

This is a losing mindset. The market is the aggregation of all investor insight, biases, prejudices, intelligence, etc. It is still dominated short term and even longer term by emotions. Greed is powerful, but fear is the master. Greed causes people to buy late. Fear causes people to panic out of otherwise perfectly good patterns and action.

William O'Neill has a good analogy comparing yellow dresses to red dresses. The yellow dresses are believed to be of less quality by an investor versus the red dresses. The investor cannot believe the market will continue to ignore the red dress maker so he buys the red dress stock. The yellow dress stock, however, simply continues to outperform, rallying while the red dresses go, at best, nowhere.

This also happens after a big selloff. Stocks set up good patterns and start to break higher. Your eyes see it but your gut and weary mind just don't want to believe it. That is when you have to step in and just do it. Back in early 2009 AMZN gapped upside. No one seemed to care; too beat up from the huge market selloff. We saw the gap and played it as AMZN broke higher from the gap. PCLN sold off hard in mid-2010 and many bailed on it, saying the big run was over. We saw it set up at support and when it moved higher we bought into it despite many badmouthing the stock. That was at $188.43, and this past week PCLN broke 1,000, the first stock to break 1K. What about NFLX? HLF? Hated because they could not possibly support the prices, or so the pundits would say. We kept buying NFLX when it told us to do so via its pattern. We made tons of money on NFLX on its runs that were not supposed to happen.

The point: for some reason perhaps unknown to us, the market wants the yellow dresses or is just ready to make a turn. It may make no sense, but buyers want the yellow dress stock. If the market, based upon the patterns and the action, tells you one stock is favored and another is not, don't try to be smarter than the market. Pick your entry when it presents itself. Buy when a stock says 'buy me,' not solely because a stock's fundamentals look good. It has to have a good pattern so we can optimize the use of our funds on stocks that are moving, not sitting. Or even worse, stocks are moving and WE are sitting.


Investors, particularly traders, want to make money, and they want to make money now. That is good; don't sit on your funds. You have to have your line in the water to catch fish. You have to be on the hunt, gun or bow loaded, for when the prey reveals itself. But, you have to let the play develop.

Don't shoot your gun when your quarry is in the deep woods. Don't cast before you are in position. Wait until the play is ready to buy. Let it show the break you are playing. As I say often, they are just pretty pictures until the move starts. Let it start so you know the pattern is working, the stock saying 'buy me.'

Further, don't be late. Don't chase the bus. If you miss your turn, don't jerk your car across traffic and risk a wreck. Be patient. Often a stock will come back to you or give you a shot to enter after a breakout. If you miss a breakout and let a stock run a bit then move in, you might get a bit more upside but then the stock tests. You can get turned upside down in a routine test of the move if you are not patient. Miss one buy, keep it on the watch list, then when it sets up again, you can still catch a breakout run on the first test, etc.

Let your winners run

When I was learning to trade and invest, I used to roll my eyes and audibly snort every time I heard a mentor or some other expert say let your winners run. What an idiotic concept I would think. Of course you would do that. But I never would.

First, I didn't really know what it meant. 10%? 20%? What is a run? Second, I just didn't have the right mindset to do it. I would pick the right play, get the right entry, then after a strong burst higher started to fade I would get very anxious, particularly with options and their limited life, and sell out. Then after a test the stock would continue higher and double the gain I took. Worse, I would not be right on another trade (you will be wrong many times and still be a great, money making trader) and by not letting my winners run as far as they would, I would eviscerate my profits.

Time and some very good mentors helped me over this. There are many techniques to overcome this problem, but the simplest to me is partial profits. Pick a logical initial target as part of your play selection, based on pattern, Fibonacci, etc. as well as the right risk/reward ratio (more on this another time), and when your stock gets there, take some profit.

SOME profit. A half. A third. Bank it. Then, let the rest of the play run. Typically you have recouped most, all, or in excess of your initial investment. The pressure is off. You can let the stock test and set up again for the next run. As long as the pattern holds up and all signs point to a continued move, you let it work. This also has elements of patience in it as well. BUT, when the initial gains are made, you will be surprised at how easy it becomes to let the rest of your position work for you.

You will also be surprised at just how far your winners will run for you once the pressure is off and you let them run. Then you worry about when to take the next gain. That is at the next logical target in the form of resistance, Fibonacci, etc. that actually acts as some resistance. Take another PART of your gain, then let the rest run. You will let that run until the stock turns and the trend breaks. In other words, just as a stock told you to 'buy me,' it will tell you to now 'sell me.'

Ultimately it is a combination of confidence. Confidence in your play picks, your entries, your targets, your analysis of the ongoing play, confidence in your plan. That way you see 50% to 70% option gains turn into 150%, 200%, 300% option gains. Stock as well. PCLN, NFLX are not typical gains, but you can easily see 20%, 30%, 50% gains on those as well.

Support and resistance

NASDAQ: Closed at 3781.59

3799 is the September 2013 high.
3808 is the upper channel line for the November 2012 to present uptrend.
Next major resistance is around 4100 as NASDAQ hits 13 year highs

The 10 day EMA at 3761
3742 is the November 2012 up trendline
3694 is the August high and the post-bear market high.
The 50 day EMA at 3663
The July 2013 intraday high at 3625
3573 is the August 2013 low
3532 is the May intraday high
3521 is the August 2000 low.
3502 is the May 2013 closing high
The 2011 up trendline at 3391
The 200 day SMA at 3372
3295 is the June 2013 low selloff
3227 is the April 2000 intraday low
3197 is the September 2012 post-bear market high
3171 is the October intraday high

S&P 500: Closed at 1691.75

1710 is the August 2013 peak.
1730 is the September 2013 peak

1687 is the May high and post-bear market high
1698 to 1700 are the July and August interim highs
1685 is the mid-August 2013 upper gap point
The 50 day EMA at 1675
1657 is the late August upper gap point
1656 is the December 2012 up trendline
1654 is the June 2013 peak
1627 is the August 2013 low
The 200 day SMA at 1590
1576 from October 2007, the prior all-time high
1573 is the June 2013 closing low
1569.48 is the 78% Fibonacci retracement of the April to May 2013 run
1560 is the June 2013 reversal low
1556 from July 2007
1541 is the April 2013 closing low in that pullback inside the uptrend
1539 from June 2007
1531 is the recent high
1499 from January 2008
1475 is the September 2012 high
1471 is the October 2012 intraday high
1466 is the September 2012 closing peak and rally closing high
1440 from November 2007 closing lows

Dow: Closed at 15,258.24

15,318 is the June closing high
15,542 is the May 2013 intraday high
16,659 is the August 2013 peak

The 50 day EMA at 15,243
15,050 from the August 2013 interim recovery high
14,888 is the April peak and prior all-time high
14,844 is the June intraday low
14,762 is the August 2013 low
The 200 day SMA at 14,657
14,551 is the June 2013 intraday low on the selloff (14,659 closing)
14,198 from the October 2007 high
14,149 is the February 2013 high
14,022 from 7-07 peak
14,010 from the early February 2013 consolidation

Economic Calendar

September 27 - Friday
Personal Income, August (8:30): 0.4% actual versus 0.3% expected, 0.2% prior (revised from 0.1%)
Personal Spending, August (8:30): 0.3% actual versus 0.2% expected, 0.2% prior (revised from 0.1%)
PCE Prices - Core, August (8:30): 0.2% actual versus 0.1% expected, 0.1% prior
Michigan Sentiment -, September (9:55): 77.5 actual versus 77.3 expected, 76.8 prior

September 30 - Monday
Chicago PMI, September (9:45): 53.7 expected, 53.0 prior

October 1 - Tuesday
ISM Index, September (10:00): 55.1 expected, 55.7 prior
Construction Spending, August (10:00): 0.4% expected, 0.6% prior
Auto Sales, September (14:00): 5.6M prior
Truck Sales, September (14:00): 7.0M prior

October 2 - Wednesday
MBA Mortgage Index, 09/28 (7:00): 5.5% prior
ADP Employment Chang, September (8:15): 170K expected, 176K prior
Crude Inventories, 09/28 (10:30): 2.635M prior

October 3 - Thursday
Challenger Job Cuts, September (7:30): 56.5% prior
Initial Claims, 09/28 (8:30): 315K expected, 305K prior
Continuing Claims, 09/21 (8:30): 2825K expected, 2823K prior
Factory Orders, August (10:00): 0.3% expected, -2.4% prior
ISM Services, September (10:00): 57.4 expected, 58.6 prior
Natural Gas Inventor, 09/28 (10:30): 87 bcf prior

October 4 - Friday
Nonfarm Payrolls, September (8:30): 183K expected, 169K prior
Nonfarm Private Payrolls, September (8:30): 180K expected, 152K prior
Unemployment Rate, September (8:30): 7.3% expected, 7.3% prior
Hourly Earnings, September (8:30): 0.2% expected, 0.2% prior
Average Workweek, September (8:30): 34.5 expected, 34.5 prior

By: Jon Johnson, Editor
Copyright 2013 | All Rights Reserved

Jon Johnson is the Editor of The Daily at

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